Deluxe Corporation: Recommendations for the Company's Board of Directors

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Case #35
Deluxe Corporation

Synopsis and Objectives

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The purpose is to recommend an appropriate financial policy for the firm and, in support of that recommendation, to show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.

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4. Using Hudson Bancorp’s estimates of the costs of debt and equity in case Exhibit 8, which rating category has the lowest overall cost of funds? Do you agree with Hudson Bancorp’s view that equity investors are indifferent to the increases in financial risk across the investment-grade debt categories? 5. Is Deluxe’s current debt level appropriate? Why or why not? 6. What should Singh recommend regarding: * the target bond rating * the level of flexibility or reserves * the mix of debt and equity * any other issues you believe should be brought to the attention of the CEO and the board

Epilogue

On August 5, 2002, Deluxe Corporation announced plans to raise its debt level to $700 million. During a subsequent conference call with analysts, Deluxe Corporation’s chief financial officer (CFO), Douglas Treff, said:

We … believe Deluxe is underleveraged. We believe our steady cash flows put us in a position to increase our debt level up to $700 million and still maintain a strong investment-grade rating. The use of debt will lower our overall cost of capital and as a result increase returns on capital invested. We expect that the debt will be a combination of both long- and short-term borrowings.

The company also announced a plan to repurchase up to 20% of Deluxe Corporation’s stock, or 12 million shares. “At current prices, we believe the repurchase of

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